American Realty: Investors want founder Schorsch out, analyst says

"In dialogue with investors it is apparent that a key component to returning value and credibility to [American Realty Capital Properties] will require the company to separate completely from founder, former CEO, and Executive Chair Nick Schorsch," analyst Chris Lucas told clients of CapitalOne Securities Inc. in a Monday report. American Realty, a Manhattan-based corporate landlord with back offices in the Jenkintown area, has lost a third of its stock-market value since the company retracted its 2014 financial reports last month.

"These steps include Mr. Scorsch's resignation as Executive Chair, relocating the company's offices, changing the company's name and logo, and anything else that creates any confusion with investors," Lucas added.

The Capital One report says investors overreacted to American Realty's admission that its accountants misstating adjusted cash flow from operations (AFFO), first by accident, then by intentionally failing to correct the error in later financial documents.

Lucas says the errors don't affect the company's reported earnings, or the value of its corporate real estate holdings. But he also says Schorsch's joint role as chair at both American Realty and other companies he controls from his Manhattan office, including investment bank and brokerage RSC Capital, has created "complexity and conflicts," as illustrated by RCS independent directors to cancel the company's planned purchase of American Realty brokerage operations for $700 million.

Lucas predicts American Realty will have a tough time raising money or closing the deals it depends on, if it can't post proper third-quarter earnings and corrected results for earlier this year by a Nov. 13 deadline.

"We expect ARCP to sell assets" and use the cash for buying back its own discounted stock and bonds, Lucas added. He said American Realty chief executive David Kay told analysts in a meeting last week that Kay used a similar strategy when he ran Capital Automotive Real Estate Investment Trust in the late 1990s during a turbulent period in the investment markets.

Litigation over the restated earnings could cost American Realty up to $442 million, Capital One estimates. The company could choose to cut its dividend if it doesn't want to sell assets, Lucas noted.

That would affect investors' income. Brokers for several investment firms have suspended sales of retail investment funds backed by Schorsch's companies since the company announced its reporting problems. Lucas points out that this precaution, and the RCS deal cancellation, seem to be excessive, since "all of the accounting issues are with [American Realty]," and not with the properties or businesses it controls, or any other Schorsch-backed funds. But he adds that Schorsch has to leave American Realty, to make this point clear.

Separately, former Pennsylvania Gov. Ed Rendell, a friend of Schorsch and an American Capital director, told the Wall Street Journal last week that the errors were due to improper bonus accounting and that investors were making a "mountain out of a molehill."